Escolar Documentos
Profissional Documentos
Cultura Documentos
Zakat on companies
Method of calculation
Presentation outlines
• Overview of accounting
• Method of calculation
• Method of valuation
• Mixed shareholdings (Muslim & non-
muslim)
1
22/11/2018
2
22/11/2018
Method of measurement
• Hence, we are looking at two perspectives, i.e.,:
– Net Current Asset/Net Working Capital (Syariyyah)
– Net Owner’s Equity Capital (Urfiyyah) (practiced by
zakah agency in Saudi)
• Logically (urf), zakat is on capital to start business,
therefore, the NOEC method is:
Owners’ equity + LTL + Profit/surplus for the
year – Fixed Asset – Other Non Current Assets
• FA is not growing hence not zakatable (disregard
mustaghallat here…)
Method of measurement
• NCA is syariyyah because the spirit of Islamic
jurisprudence implies that NCA is similar to
urudh attijarah (UT), i.e., business stock.
• Jurists states that UT is commodities
obtained for the purpose of resale for profit.
• Thus, the liabilities incurred in securing the
assets is also allowed for deduction, hence,
NCA method is:
• Current Asset (milk taam) – Current
Liabilities (operational/ trading only)
3
22/11/2018
Method of measurement
• Both methods result in the same amount
as this is the accounting equation.
• OE + LTL – FA = CA – CL
• However, both methods requires some
adjustments (as discussed in previous
class).
• Using NCA methods, the calculation of
zakat is
• CA – CL +/- adjustments = zakatable
amount
Methods of Measurements
• Some scholars adjust the NCA to reflect
only operational activity.
• Badawi and Sultan (Net Growing Capital
Method)
• FORMULA= Net Working Capital
Add back short term debt (i.e., CL used to:
a) finance fixed assets
b) pay off long term debt
c) reduce capital stock
Less long term debts used to finance current
assets
8
4
22/11/2018
Methods of Measurements
• Notes:
– The latest method; complicated & more objective
method(?)
– Provides reconciliation / adjustment for NCA, to
make sure that NCA reflects trading activity
– Reflects true and fair value of NTA by adjusting
items that distort / misrepresent CA and CL
– Adjustments need to be done in several unique
situations which distorts the NCA value – hence –
consequently distorts the amount of zakat due
Methods of Measurements
• Examples:
– Buy FA using CL (results in higher CL, hence
undervalue NCA. Thus, should be minus from CL so
that the amount of NCA increase back).
– Pay LTL using CL (results higher CL, hence
understate NCA. This should be minus from CL, so
that NCA increase again)
– Buy back own share using CL (eg. OD) (result
higher CL, thus undervalue NCA. Thus, should be
minus from CL so that the amount of NCA increase
back)
– Buy CA (e.g. inventories) using LTL (result higher
CA, thus overstate NCA). This should be minus back
from CA to reduce the amount of NCA)
10
5
22/11/2018
6
22/11/2018
13
14
7
22/11/2018
Other methods
15
Limitation on current FS
• Some limitations:
– Information needed are not available in FS
– Difficult & time consuming for both zakat payer & zakat
authority to trace all transactions (not practical)
– Must have a zakat officer with [sufficient] accounting knowledge
to identify the transactions
– Valued assets at historical cost
• Shariah requires ‘current value’
– Quality of information provision
• Reliability issues.
• Creative accounting.
• Professional judgment
• Unethical conduct, etc.
– Availability of internal & external information of how FA are
bought? (LTL, CL or Cash?)
16